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Since 1990, GAO has identified the Department of Defense's (DOD) inventory management as a highrisk area. Ineffective management practices--such as the use of inaccurate data, lack of inventory controls and visibility, and information system weaknesses--have contributed to high levels of inventory. DOD has reduced its inventory since 1990, from about $100 billion to about $67 billion as of September 30, 2002. However, at the start of Operation Enduring Freedom, about half of the inventory exceeded current operating requirements. GAO, under its statutory authority, analyzed the extent to which inventory that exceeded current operating requirements as of September 30, 2001, was consumed through cutoff dates ranging from March through October 2003 and identified three ineffective and inefficient inventory management practices.

GAO's analysis of 1.5 million items with $35.1 billion of inventory on hand that exceeded current operating requirements as of September 30, 2001, showed that about $4.0 billion was consumed--$2.5 billion was used, $0.5 billion was disposed of, and $1.0 billion was condemned--since the onset of Operation Enduring Freedom and through the initial phases of Operation Iraqi Freedom. GAO found that, once disposals and condemnations were accounted for, 539,000 items had inventory that was used, 18,000 had inventory gains, and 937,000 had neither inventory usage nor gains. Of the 1.5 million items, customers did not make demands for 923,000 items during the period of review. GAO also identified three ineffective and inefficient inventory management practices that may affect inventory levels, including the inventory exceeding current operating requirements. First, although Defense Logistics Agency (DLA) has begun to charge its customers for inventory storage based on the actual space occupied by items, the military components are not using the DLA storage cost data, and instead continue to use estimated storage costs in their inventory management decision-making processes. Second, the Air Force does not have a systemwide process for correcting the causes of discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers. Third, Air Force item managers are not required to enter codes into the Air Force inventory system for items that are categorized as potential reutilization and/or disposal materiel, but that the Air Force wants to retain; thus, the items are not properly categorized and are at risk of disposal.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: DOD concurred with this recommendation. DOD stated that it would complete its review to determine if it were feasible to use this data instead of estimated storage costs in their computations. Review was to be completed by January 2005. In December 2005, DOD reported that the review was completed. The review concluded that (1) it was not feasible to update legacy systems to incorporate the actual storage cost data; and (2) as the military departments implement their modernized systems, they will work with DLA to include DLA storage cost data in their computations.

Recommendation: To address the inventory management shortcomings that we identified, the Secretary of Defense should direct the military services and the Defense Logistics Agency to determine whether it would be beneficial to use the actual storage cost data provided by DLA in their computations, instead of using estimated storage costs, and include that data in their systems and models as appropriate.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: DOD concurred with this recommendation. Air Force organizations will work to resolve erroneous inventory discrepancies between retail and wholesale data systems. DOD also stated that the new logistics system (Expeditionary Combat Support System) being procured in the FY09-11 timeframe will eliminate discrepancies between wholesale and retail inventory systems. In the interim, DOD reported that the Air Force implemented in-transit reconciliations as an interim solution for items with high demand and those used at many locations. For items with high levels of contract repair, the Air Force implemented the Contractor Asset Visibility system as an interim solution. These solutions will remain in place until the new logistics system is in place.

Recommendation: To address the inventory management shortcomings that we identified, the Secretary of Defense should direct the Secretary of the Air Force to establish and implement a systemwide process for correcting causes of inventory discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: DOD concurred with this recommendation. DOD stated that the Air Force, by September 2005, would report how it will ensure compliance with the existing policy. However, the existing policy, as stated, does not contain language that would require the use of codes that would properly categorize the inventory. In response, the Air Force issued a policy memo in June 2005 reiterating Air Force policy, as stated in AFMAN 23-110 Vol.3 Part 1, CH9 paras 9.49, 9.63, 9.64.2, and 9.64.3, and Attachment D-6 requiring that deferred disposal codes be used appropriately that and retention and disposal coding is done properly.

Recommendation: To address the inventory management shortcomings that we identified, the Secretary of Defense should direct the Secretary of the Air Force to revise its policy to require item managers to code inventory so that the inventory is properly categorized.